Empirical Study On Return, Volatility And Investor Sentiment In Chinese Stock Market

As an immature emerging capital market, Chinese stock market differs a lot from the foreign mature stock markets. The"financial anomalies"in Chinese stock market appear to be more evident and stronger. Investor sentiment is an important factor that revealing the psychological state of investors and must have great impacts on investors'behavior and decision, which hence influent stock market return and volatility. Therefore, comprehensive investigation of the interrelationships among Chinese stock market return, volatility and investor sentiment is supposed to provide an efficient method to interpret the"financial anomalies"in Chinese stock market, which hence be of profound theoretical and practical significance for enhancing the risk management and control on Chinese stock market, improving the efficiency of governmental supervision, and ensuring the steady, sustained and sound development of Chinese stock market. Constructing investor sentiment indicator by applying"HaoDan Index"released by and taking the investor sentiment indices, the weekly return ratio of Shanghai Composite Index and the related data about the individual stocks between May 2005 and December 2009 as the empirical samples, this paper uses the econometric models and methods, such as nonparametric test based by dynamic sorting, VAR model, Granger Causality test and GARCH model, to empirically study the relationship among Chinese stock market return, volatility and investor sentiment.The main research work and the innovation are as follow:①From the aspects of the institutions of Chinese stock market, the investor structure and the industry characteristics, this paper analyzes the sources of investor sentiment in Chinese stock market. According to the practical situation of Chinese stock market, this paper analyzes the main characteristics of investor sentiment, such as speculative motivation, herd behavior and over-confidence.②Constructing short-term investor sentiment index and mid-term investor sentiment by applying"HaoDan Index"and taking the investor sentiment indices, the weekly return ratio of Shanghai Composite Index and the related data about the individual stocks as the empirical samples, this paper uses the econometric models and methods, including nonparametric test based by dynamic sorting, VAR model, Granger Causality test, to empirically study the relationship between investor sentiment and Chinese stock market return as well as the relationship between investor sentiment and the returns of stock portfolios sorting by volatility, market value, age, profitability and PB. The study results uncover that mid-term investor sentiment index exerts a significant positive influence on future market return, but the short- term investor sentiment index contains no reliable information about the future market; in turn, market return can affect both short- term and mid- term investor sentiment index. The results imply that mid-term investor sentiment exerts larger significant impacts on the returns of stock portfolios with high volatility, large market value, short listing period, but short-term investor sentiment can not affect the returns of stock portfolios; in turn, the returns of stock portfolios with low volatility, large market value, short listing period, high profitability and medium PB would have greater effects on short-term investor sentiment; however the returns of all stock portfolios could not significantly affect mid-term investor sentiment index.③Taking the investor sentiment indices and the weekly return ratio of Shanghai Composite Index as the empirical samples, this paper study how mid-term and short-term investor sentiment indices affect the volatility of Chinese stock market return by applying GARCH model. The conclusions show that the first order lag of the change of mid-term sentiment index exerts a significant negative effect on market return volatility, while the second order lag of the same variable have a significant positive impact on market return volatility; however, the fist order lag and the second order lag of the change of short-term sentiment index could not significantly affect market return volatility.